Optimistic Investors Push Tuya Inc. (NYSE:TUYA) Shares Up 31% But Growth Is Lacking

Tuya Inc. (NYSE:TUYA) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.

In spite of the firm bounce in price, it's still not a stretch to say that Tuya's price-to-sales (or "P/S") ratio of 4x right now seems quite "middle-of-the-road" compared to the Software industry in the United States, where the median P/S ratio is around 4.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Tuya

What Does Tuya's Recent Performance Look Like?

Recent times have been advantageous for Tuya as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Keen to find out how analysts think Tuya's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Tuya's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 34%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 1.2% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 17% over the next year. Meanwhile, the rest of the industry is forecast to expand by 24%, which is noticeably more attractive.

In light of this, it's curious that Tuya's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Tuya's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that Tuya's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Tuya with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Tuya, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.